Malaysian crude palm oil futures are likely to hover at 1,600 ringgit per tonne as long as oil prices trade around $80 a barrel amid a slowdown in the global economy, top industry analyst Dorab Mistry said on Friday. Mistry said palm oil at 1,600 ringgit - slightly more than a third above the break even point for mid-size plantation firms - was also thanks to bumper harvests in top producers Malaysia and Indonesia while Asian demand cooled.
He said prospects of palm getting channelled into biofuels could be slim unless prices continue to stay low for at least 8 to 10 weeks because margins are always erased when traders start locking in positions in anticipation of higher demand. January 2009 palm oil closed down 97 ringgit at 1,651 ringgit on Thursday, and have slumped more than 46 percent so far this year, igniting fears of further defaults from top buyers India and China.
"If crude oil is trading at or below $80 and the prognosis is for a weak economy and lower prices, then palm oil needs to get ahead of the curve and to demonstrate its price competitiveness," Mistry said in a speech to be delivered at an industry conference in China. "There is no use palm declining to 1,600 ringgit for one session only to be ramped up to 2,000 ringgit the next year.
Vegetable oils such as soyoil and rapeseed oil are used as a feedstock for biodiesel, which means palm oil often moves in tandem with crude oil, which has more than halved since a record high in July. "A biodiesel producer will not re-commission his plant unless he can tie up at least one year's supply at the low workable price and also lock in his selling price," Mistry said.
Malaysia, second largest producer of palm oil, has an annual biodiesel production capacity of 1 million tonnes. The palm price plunge has tilted the equation slightly in favour of the green fuel, with 25 percent of the capacity now in use, up from less than 5 percent six months ago.
But even though biodiesel is now more readily accepted as a means to boost demand, the Malaysian government will only decide on biodiesel mandates on October 21 in a special cabinet meeting to boost palm oil competitiveness after months of dragging its feet.
Indonesia, the world's top palm producer, issued a ministerial decree last month that will make the use of biofuels mandatory in transportation and industrial sectors from 2009.
SURGING SUPPLIES Malaysia and Indonesia are still undergoing an upswing in output while the Asian festival season draws to the end and big buyers India and China harvest bumper oilseed crops, said Mistry, head of vegetable oil buying with Indian firm Godrej International. Malaysia says crude palm oil output will reach 17.4 million tonnes in 2008. The Indonesian Palm Oil Producers Association is forecasting 18.6 million tonnes this year.
"We shall see some deceleration of demand and exports. Therefore, I continue to believe that in the first half of November, the combined stocks of Malaysia and Indonesia will exceed 5 million tonnes," he said. Mistry said supplies are set to rise further unless biodiesel demand comes into the picture as farmers including palm oil producers tend to focus on planting more rather than cutting down on output.
"In times of economic difficulty farmers usually take the line of least resistance and plant more rather than less," he said. "They may cut down the use of fertiliser but they will not reduce plantings. Malaysian palm producers have said planting intentions were going to increase as they planned to tap higher prices of the tropical oil in the future once oil palms mature in three years.